Glossary · Funds and derivatives

ETF

An ETF (exchange-traded fund) is a basket of many investments, such as hundreds of stocks, that you can buy or sell as a single share on a stock exchange.

Also called: exchange-traded fund, index ETF

Live numbers, updated every night

What a 1% yearly fee cost over 30 years

$46,778

On $10,000 in the S&P 500 since Oct 1996: $184,449 with a 0.03% fee, $137,671 with 1%.

In plain words

Buying one share of each of the 500 biggest US companies would cost a fortune and take all day. An ETF does it for you: a fund buys all 500, then splits the whole basket into shares that trade on the stock exchange like any company’s stock. Buy one ETF share and you own a thin slice of all 500.

Most ETFs simply copy an index, such as the S&P 500, the world’s stock markets, government bonds or gold. Because nobody has to pick stocks, they are cheap to run: the biggest index ETFs charge 0.03% to 0.10% a year, which is $3 to $10 on every $10,000.

You can buy and sell them any time the exchange is open, at that moment’s price, unlike ordinary mutual funds, which trade once a day at the closing price.

One ETF share is a thin slice of the whole basket. The fund holds the stocks; you hold shares of the fund.

Example

What the fee really costs

Fees look tiny because they are quoted per year, but they are taken every year from a growing pot, so they compound against you.

$10,000 put into the S&P 500 in Oct 1996, dividends reinvested, with a 0.03% yearly fee: $184,449 by Oct 2026.
The same with a 0.5% fee: $160,132.
With a 1% fee: $137,671.

The 1% fee took $46,778, or 25% of what the cheap fund ended with.

One level deeper

How does an ETF’s price stay close to the value of what it holds? Big trading firms called authorized participants can swap a basket of the underlying stocks for new ETF shares, or hand ETF shares back for the stocks. If the ETF gets dearer than its basket, they create shares and sell them; if it gets cheaper, they buy and redeem. That arbitrage keeps the gap tiny.

Not every ETF is a plain index fund. Some bet on a narrow theme, some are actively managed, and leveraged ETFs try to double or triple the daily move of an index, which over longer periods can drift far from what you would expect.

The first US ETF, tracking the S&P 500, started trading in January 1993. The yearly fee is called the expense ratio.

$10,000 in the S&P 500 for 30 years, at three fee levels

The same market and the same dividends; only the yearly fee differs. The lines look alike for a decade and then fan out.

0.03% a year (a cheap index ETF)0.5% a year1% a year

S&P 500 total return (dividends reinvested monthly) minus the fee, charged monthly; before taxes and trading costs. A model, not real funds.

The numbers behind the chart

Date	0.03% a year (a cheap index ETF)	0.5% a year	1% a year
Oct 1996	$10K	$10K	$10K
Dec 2000	$20.1K	$19.7K	$19.3K
Dec 2010	$22.6K	$21.1K	$19.6K
Dec 2020	$81.6K	$72.8K	$64.4K
Dec 2022	$88.9K	$78.6K	$68.9K
Dec 2023	$108K	$95.1K	$83K
Dec 2024	$141K	$123K	$107K
Dec 2025	$162K	$141K	$122K
Oct 2026	$184K	$160K	$138K

Why it matters

ETFs made it cheap for anyone to own a whole market with one purchase, which is the easiest way to get diversification.

Costs matter: as the chart shows, a 1% fee can take about a quarter of the result over 30 years.

Because they trade all day, they are easy to buy, and just as easy to trade too often.

A common mistake

Myth: An ETF is safe because it holds many stocks.

In fact: Holding many stocks removes the risk of one company failing, not the risk of the whole market falling. An S&P 500 ETF falls about as much as the index itself, as in 2008 and in March 2020.

Questions people ask

ETF or index fund: what is the difference?

Both can follow the same index. An ETF trades on the exchange all day like a stock; a classic index mutual fund is bought from the fund company once a day at the closing price. Costs and taxes can differ a little.

How do ETF managers make money?

Through the yearly fee (the expense ratio), taken out of the fund’s assets day by day, so you never see a bill. Some also earn by lending out the shares they hold.

Can an ETF go to zero?

A broad index ETF would go to zero only if every company in it failed. A narrow or leveraged ETF can lose almost everything, and some have been closed after huge losses.

About the numbers

The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
This page explains a term. It is not investment advice.